More than in stock markets, there is a bubble in the orchestrated positive spin on economic data. There is a dangerous agenda behind it.
We have to start with the US, the mother ship for all of this. Almost all the recent data has been spun positively by a pliant media. Headline factory orders were slightly better. That was trumpeted. The sizeable downward revision to figures for previous months did not find any mention.
Continuous claims for unemployment benefits dropped. Continuous claims refers to the number of people who continue to claim unemployment insurance. What is suppressed is the fact that once claimants withdraw their maximum entitlement from the unemployment insurance fund, they drop out of the continuous claims roll. That a drop in continuous claims is inconsistent with a lengthening of the duration of unemployment (the number of weeks someone remains unemployed after losing a job) eludes the spin masters.
The jump in retail sales in May was extolled whereas the fact that it was mainly because of rising petrol prices was suppressed. Without that, retail sales growth was tepid at best. Moreover, the price of petrol has continued to rise.
Further, spin is embedded in official data itself. Take the non-farm employment number for May. The US non-farm economy lost “only” 345,000 jobs in May compared with expected job losses of at least 500,000. Digging deeper, one finds that the birth/death adjustment model contributed substantially to the non-seasonally adjusted data on jobs created.
The birth/death adjustment model is meant to estimate jobs created by new businesses and lost due to closing businesses. In downturns, it exaggerates job creation and in upturns, it understates it. In May, non-seasonally adjusted non-farm job creation was 319,000. Out of that, 220,000 jobs are estimated to be created by new businesses! In April, the number was 226,000. It is inconceivable that new businesses are being set up at such a rate (if they are being set up at all) that they create so many new jobs. This is model-generated spin.
This is the backdrop for the US treasury secretary’s recent visit to China. He told his audience that America was committed to a strong dollar and fiscal austerity. The US government’s attitude to China is seemingly puzzling. The US is the biggest debtor in its own currency. Usually, big lenders are at the borrower’s mercy. Second, China cannot avoid accumulating US dollar assets as long as it keeps its currency fixed to a depreciating dollar.
Hence, the US can afford to use counter-cyclical fiscal policy, depreciate the dollar to compensate for weak domestic demand with external demand, and China will have no choice but to keep accumulating dollars as long as it keeps its currency fixed. Therefore, for America to plead with China to keep faith in treasurys is unnecessary. The reasons are likely rooted in the economic interests of the anxious elite on both sides.
A sizeable chunk of China’s exports is still generated by foreign (mostly American) businesses outsourcing their production processes to China. Hence, they have as much interest vested in China’s export-dependent growth model with an undervalued currency, lax labour and environmental standards, as China’s elite. That is why, for the most part, America’s appeals to China to revalue its currency were mostly toothless. They were face-saving exercises for both sides.
This hurt Middle America badly. For the first time since World War II, America’s economic expansion since 2002 was characterized by anaemic job creation, income growth and expansion of bottom and top income quartiles and the shrinking of the middle class. Hence, they were “bribed” with low interest rates and an asset price bubble. How that ended is now well-known. Yet, the avarice of the elite on both sides remains undiminished.
On its part, China has failed to use the crisis to wean itself off external demand and, hence, continues to accumulate reserves. It is boosting manufacturing capacity in many areas and extending export rebates to more products. The shift to a domestic economy model requires re-writing the social contract between the Communist Party and the public. So, the Chinese government is content to postpone the inevitable for now.
Which bubble to stoke now that would keep Middle America hooked again so that businesses could continue to slash jobs, outsource, boost profits and stock option values? That is the trillion dollar question. It appears that the elite has zeroed in on the emerging market bubble. It would take some persuasion for it to work against the entrenched home bias of investors worldwide. Second, it might be too much to expect them to be fooled again when memories are still fresh. Third, emerging economies are still ill-equipped to deal with both bubbles and their aftermath. Some of them could collapse.
Unfortunately, investors are not asking hard questions. They prefer short-run bubbles. Governments and the elite are ready to generate one. This is dangerous behaviour by all concerned.
V. Anantha Nageswaran is chief investment officer for an international wealth manager. These are his personal views. Your comments are welcome at firstname.lastname@example.org